Taking VRS? Tax Exemption Is Usually Rs 5 Lakh, But Some Employees May Qualify For More

Taking voluntary retirement can bring a sizeable lump-sum payout, but the tax treatment of that money is not always as simple as applying a flat exemption. In most cases, compensation received under a Voluntary Retirement Scheme (VRS) gets tax relief of up to Rs 5 lakh. A recent tribunal ruling, however, shows why employees should first understand what kind of separation scheme they are leaving under.

A former Bharat Sanchar Nigam Limited (BSNL) employee who opted for the company’s VRS-2019 scheme had claimed an exemption of Rs 5 lakh under Section 10(10C) of the Income Tax Act, 1961 while filing returns for assessment years 2020-21 and 2021-22.

She paid tax on the balance ex gratia amount.

She later challenged this treatment after becoming aware of favourable rulings on the BSNL scheme. The Chennai bench of the Income Tax Appellate Tribunal eventually allowed her claim and treated the compensation differently.

What The Normal VRS Rule Says

Section 10(10C) allowed an exemption of up to Rs 5 lakh on eligible amounts received at the time of voluntary retirement or voluntary separation. It covered employees of the Central and state governments, public sector companies, private companies, local authorities, co-operative societies, universities, IITs and certain notified institutions.

The scheme had to satisfy the prescribed conditions, including those under Rule 2BA. The exemption could be claimed only once in an employee’s lifetime, and any eligible amount above the ceiling was generally taxable as salary.

For tax year 2026-27 onwards, the Income Tax Act, 2025 applies. The corresponding VRS benefit has been carried into Section 19, with the Rs 5 lakh limit continuing under the new framework.

Why The BSNL Employee Got Bigger Relief

The tribunal noted that BSNL VRS-2019 was part of a government-approved revival package for BSNL and MTNL and was supported through the Union government’s budget, according to a recent report by The Economic Times.

On the facts of the case, the scheme was not treated merely as an ordinary voluntary retirement arrangement. It was considered to have the character of a government-approved retrenchment scheme, bringing Section 10(10B) into play.

Ordinarily, retrenchment compensation also faces prescribed limits. But the law provides an exception where compensation is paid under a scheme specifically approved by the Central Government for extending special protection to workers. In such cases, the normal ceiling can cease to apply.

The ruling does not mean every VRS payout is fully tax-free. The result depends on the purpose of the scheme, the legal basis of the separation, the employer’s documentation and whether the exit is genuinely voluntary or part of a wider retrenchment exercise.

Employees receiving a large VRS or separation payment should therefore check the scheme papers before filing their return. Choosing the wrong provision can result either in avoidable tax or an exemption claim that may later be questioned.

FAQs

1. How much tax exemption is normally available on VRS compensation?
Eligible VRS compensation generally gets an exemption of up to Rs 5 lakh. Any amount above the applicable exemption may be taxable.

2. Can a VRS payout qualify for more than Rs 5 lakh exemption?
In certain cases, yes. If the separation is treated as part of a government-approved retrenchment scheme, different tax provisions may apply.

3. What should employees check before claiming VRS tax exemption?
They should review the scheme terms, employer documents, and the legal nature of the separation to determine which tax provision applies.